The U.S. Postal Service and its employee unions are chafing at requirements to pre-fund its retirement health care obligations. They argue that this squeezes the agency, while critics respond that to do otherwise will shift the burden to future taxpayers.

The Government Accounting Office recently released a report arguing that the Post Office should "prefund its retiree health benefit liabilities to the maximum extent that its finances permit.”

“To the extent short-term prefunding payments are postponed,” GAO wrote, “greater payments would be required later, supported by a smaller base of mail volume, with price caps further limiting revenue."

The USPS would prefer to shift to a "pay as you go" approach, which would fund ongoing retiree health care costs from current revenues. GAO objected to this, according to Government Executive, arguing it would result in ever high postal rates.

The dispute occurs against a backdrop of falling demand, as mail becomes less and less of a necessity in an electronic world. USPS revenue in the future, GAO suggested, will slip from even inadequate current levels, and thus any "pay as you go" for future retirees would be a pyramid scheme imposed on a smaller base, ultimately shifting to taxpayers.

The controversy also highlights an emerging piece of the growing public pension controversy. Most attention has focused narrowly on unfunded pensions, per se. But "other post employment benefits" such as health care have also been poorly accounted for.

Other post employment benefits were a major contributing factor in the bankruptcy of Stockton, Calif. Free health care for life for retirees and spouses was "the lavish perk that did the most to bankrupt Stockton," wrote Cate Long at MuniLand.

Stockton's health care plan was self-funded and drawn on demand from general revenues. No investment was made to cover growing future burdens. In the city's bankruptcy, the courts eventually allowed the city to abandon its health care promises.

The requirement that the postal service prefund its health obligations strikes the USPS and its unions as unfair. Joseph Corbett, the USPS chief financial officer and executive vice president, wrote a response included in the GAO report, arguing that the Postal Service “does not have the financial resources to make the prefunding payments required by current law.”

The USPS has the backing of its unions in this dispute. Fredric Rolando, president of the National Association of Letter Carriers, asked Congress to “reject the GAO’s policy myopia. ... Government records show that 80 percent of all the USPS red ink stems directly from prefunding," the Washington Post reported.